iFast Corporation - DBS Research 2019-02-20: Limited Upside

iFast Corporation - Limited Upside

First decline in AUA on a quarterly basis in 4Q18, after nine consecutive quarters of record AUA levels.

Downgrade to HOLD on limited upside to lower Target Price of S$1.19.

Downgrade to HOLD on limited upside to lower Target Price of S$1.19.

IFAST CORPORATION LTD. (SGX:AIY) has made significant progress in the last 2-3 years by broadening the range of investment products and services on its platforms and laying the infrastructure to kick-start its business in China, a market it believes will be key in the future.

The group is now a more integrated wealth management platform, with 5 key product groups – unit trusts, ETFs, bonds, stocks and insurance. iFAST is also pursuing a virtual banking licence in Hong Kong. This would strengthen its position as a key wealth management Fintech player.

iFAST’s share price has done well in FY18, rising by 21% y-o-y, vs -10% for the market, and 8% gain YTD 2019, vs +7% for the market. We believe the good run in iFAST’s share price has factored in most of the positive developments.

While we had maintained an AUA growth of 5% going forward, the AUA base was smaller than expected, leading us to lower our forecast net earnings, and thus a lower Target Price. Given the limited upside to the lower Target Price, we are downgrading the stock to HOLD.

More room for AUA growth.

We maintain our AUA growth assumption of 5% p.a. for FY19F and FY20F. We believe that there is still room for growth as the current AUA level remains small, at < 1% of the size of the asset management industry in Singapore.

FY18 results in line; weak 4Q18.

iFAST reported healthy growth in FY18. However, 4Q18 was weak, due to rising US central bank interest rates, weaker Chinese growth and the ongoing trade conflict between the US and China.

Valuation:

Downgrade to HOLD on limited upside to lower Target Price of S$1.19.

We cut our earnings forecasts by 11% for both FY19F and FY20F, on lower AUA estimates given the lower base in FY18. Downgrade to HOLD on limited upside to lower Target Price of S$1.19.

Our Target Price is based on Dividend Discount Model (DDM) valuation methodology, given that it is a cash-led business.

Key Risks to Our View:

The securities and financial services industry is highly regulated and iFAST is subject to a variety of laws and regulations across the regions it operates in. iFAST’s operations are also vulnerable to market sentiment.

WHAT’S NEW - Healthy growth in FY18

FY18 results in line: iFAST reported healthy growth in FY18.

iFAST’s FY18 revenue grew 19.8% y-o-y to S$121.2m while net profit surged 42.7% to S$10.7m, in line with our expectations. Excluding China, which generated a net loss of S$4.6m vs S$4.17m in FY17, net profit would have been S$15.5m (+30% y-o-y).

A final DPS of 0.9 Scts was declared, bringing iFAST’s total DPS for the FY18 full year to 3.15 Scts (FY17: 3.01 Scts).

Weak 4Q18:

4Q18 saw a 16.4% q-o-q drop in revenue to S$26.2m and a steeper 22.9% fall in net profit to S$1.96m. Global markets continued to be weak in 4Q18, due to rising US central bank interest rates, weaker Chinese growth and the ongoing trade conflict between the US and China.

First decline in AUA on a quarterly basis in 4Q18, after nine consecutive quarters of record AUA levels.

A sharp sell-down of global financial markets in 4Q18 resulted in a 5.3% drop in AUA to S$8.05bn. As at 3Q18, iFAST has registered nine consecutive quarters of record AUA levels. In recent times, iFAST has enhanced its overall capabilities as a Wealth Management Fintech Platform.

It is benefitting from continuing efforts in widening the range of investment products and services and strengthening the financial technology capabilities of its platforms. It is also seeing an increase in Fintech Solutions IT fees.

Key contribution from Singapore and Hong Kong; Unit Trusts still the key product.

AUA for Singapore/Hong Kong/Malaysia grew 4.2%/9.8%/12.5% on a y-o-y basis as at 31 December 2018. Singapore is still the key contributor to AUA, accounts for 67% of the total AUA, followed by Hong Kong with 22.9% contribution.

In terms of products, 84.9% are unit trusts, and the balance of the products category – stocks, ETFs, bonds, accounted for < 10% each.

Not shortlisted for Virtual Banking licence in HK for now.

iFAST had previously announced that iFAST Hong Kong operation (“iFAST HK”) has put in an application to Hong Kong Monetary Authority (HKMA) for a Virtual Banking licence in Hong Kong. The group has recently been notified by HKMA that iFAST HK is not among the first batch of shortlisted companies to progress into the next phase of applications. However, the group will still continue to pursue the licence application.

A Virtual Banking licence will give iFAST the ability to provide some basic banking services such as deposit taking and lending, which can potentially enhance the capability of a wealth management platform substantially.

AUA as at 31 December 2018 registered a 6.2% y-o-y gain to S$8.05bn, below our expectation of 12% growth to S$8.5bn. We are still maintaining our AUA growth assumption of 5% p.a. for FY19F and FY20F, as the group continues to broaden its range of investment products and services on its platforms.

However, given the lower base for FY18, our AUA estimate for FY19F and FY20F is now lower. As such, our earnings estimate, which is derived from AUA, is lowered by 11% for both FY19F and FY20F. Our new Target Price based on the DDM valuation methodology is reduced to S$1.19, from S$1.33 previously.

iFAST’s share price has done well in FY18, with a 21% y-o-y, vs -10% for the market, and 8% gain YTD 2019, vs +7% for the market. Given the limited upside to our Target Price, we downgrade the stock to HOLD.

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